July 22 (Reuters) - U.S. Treasury yields steadied on

Wednesday after a bond selloff on concerns that higher oil

prices could reignite inflation and prompt additional

interest-rate hikes, with investors also awaiting a sale of

longer-dated government debt.

Two-year yields, which tend to reflect

interest-rate expectations, have risen nearly 9 basis points to

4.26% since Friday, inching toward last week's

17-month high of 4.298%, before a series of tame inflation

reports.

Money markets pricing shows a one-in-five chance of a

quarter-point rate hike by the Federal Reserve at its July 28-29

meeting, up from around a 10% chance after last week's surprise

soft reports on consumer and producer inflation.

"In a lull of domestic data, market participants' focus has

turned to the potential for a hawkish surprise at the July FOMC

meeting, and market pricing has continued to drift in a more

hawkish direction," Jay Barry, head of global rates strategy at

J.P. Morgan wrote in a note.

Oil prices scaled six-week highs on Wednesday, breaking

above $92 a barrel on mounting fears over supply disruption from

the Red Sea and the Strait of Hormuz as hostilities U.S.-Iran

hostilities escalated.

The yield on the benchmark 10-year note hovered

near a two-month high of 4.634%.

The U.S. yield curve has barely moved this week, leaving the

premium of 10-year yields over 2-year steady around

37 basis points.

By contrast, 2-10 spreads elsewhere have steepened sharply,

reflecting the faster rise in shorter-dated yields, as investors

rush to price in a higher chance of rate hikes in the euro zone,

Japan, Britain and Canada, for example.

FOCUS SHIFTS TO AUCTION

Attention will shift to the Treasury Department's

$13-billion auction of 20-year bonds later in the day. Yields on

the 20-year bond held near two-months highs at

5.145% ahead of the sale.

The auction can be digested smoothly, given the higher level

of outright yields and less supportive equity valuations,

J.P.Morgan's Barry said. A $21 billion auction in 10-year

Treasury Inflation-Protected Securities will take place on

Thursday.

The 10-year TIPS breakeven rate was at

2.351%, its highest since April 2025, indicating the market sees

inflation running at about 2.3% in 10 years' time.

(Reporting by Medha Singh in Bengaluru; Editing by Amanda

Cooper and Arun Koyyur)